Do Hong Kong’s long-suffering investors in initial public offerings finally have something to look forward to? The jumbo listing of Dr Cheng Yu-tung’s jewellery retail empire has been widely flagged and heavily anticipated.
With Hong Kong being swiftly redefined as a nation of shopkeepers catering to 22.6 million mainland visitors a year – three times the territory’s population – every investor understands this consumer story. Mainland shoppers are buying more and more luxury items, and those in the business of retailing much-desired goods such as gold and jewellery are experiencing boom times.
Watch, jewellery and gift sales rose 50% in the first eight months of the year in Hong Kong, largely thanks to power shoppers from the mainland.
Enter Chow Tai Fook Jewellery, which has been active in diamonds, jade and gold for about 80 years. It’s also one of only 67 firms allowed to do business with De Beers’ Diamond Trading Company as well as with Rio Tinto as a “select diamantaire” (an accredited buyer for uncut diamonds). And it’s the largest jewellery chain in China, with about 1,500 outlets.
The jeweller’s US$3 billion plus listing befits the zeitgeist of selling branded gear to newly enriched mainland consumers, which perhaps explains why the bookrunners have chosen to attempt doing a deal at a low point in sentiment for equities.
But for all the substantial positives of this transaction, there are several issues that could warrant scepticism.
For starters, like most offerings that capitalise on a boom phenomenon (and this surely is one), Chow Tai Fook is pricey and may be vulnerable to a downturn.
With a reported valuation for the company of 18 to 25 times its forecast 2013 earnings, Chow Tai Fook is priced well above local players Luk Fook Holdings and Chow Sang Sang. Luk Fook trades on a price/earnings ratio of only 10.8 and Chow Sang Sang of 10.4. Even Tiffany only enjoys 16.4 times 2013 earnings. Bulgari, however, is on 29 times.
At that level, Chow Tai Fook will need to be benchmarked against the very best global players that enjoy worldwide brand recognition. But it’s almost entirely a local operation, which relies on mainlanders for 90% of its sales, and also a name that’s pretty much unheard of outside China, Hong Kong, Macau and Taiwan. Amid talk of a slowdown in China, one may perhaps not continue forever on a path of juggernaut growth.
Given the anguished state of the markets, even for an issuer with such a wide platform, and one that boasts 60% annual growth, a multibillion-dollar listing will be challenging. Neither the pushy valuation will help, nor will the dire retail investor demand experienced so far this year.
Ironically, while Cheng himself has featured as a cornerstone investor in countless IPOs in Hong Kong, no such anchor investors had been announced as of Friday. However, it’s still early days and, with bookbuilding starting only next Monday, there’s ample time for the lead banks to try to park away a significant portion of the deal with cornerstone investors before the order-taking process.
Tai fook means good luck in Cantonese. That might come in handy. Pricing is targeted for December 8.
Philippe Espinasse worked as an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press.
[This article was originally published in The South China Morning Post on 21 November 2011 and is reproduced with permission.]
(c) 2011 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.